Inventory financing: How to maximize your chances of getting a loan

Financing inventory can help boost growth and increase sales. Here’s what you need to know.

11-minute read

Published February 20, 2025

Inventory financing is a type of short-term business financing that can help your businesses obtain funds to purchase goods, supplies and materials.

This type of financing can come in handy if your company is growing fast, has seasonal sales cycles or if you’ve just landed a big contract or a new client.

“It is a good business practice to never fully utilize your cash on hand for current expenses, such as buying inventory. This can leave your business exposed in case of unforeseen events and expenses,” says Concetta Farina, Account Manager, Virtual Business Centre, BDC.

How does inventory financing work?

Inventory is often one of the most valuable assets that a business owns. Inventory disruptions can increase costs, disrupt operations and cause customer disappointment and frustration.

Alternatively, having too much inventory is expensive, with annual carrying costs ranging from 20% to 30% of the inventory’s value. Balancing your inventory needs effectively is key to remaining profitable.

Financing inventory purchases can help you take advantage of growth opportunities—and prevent understocking, overstocking, over-purchasing and waste.

Retailers, wholesalers or manufacturers—companies in sectors that rely on maintaining larger amounts of stock—are more likely to rely on inventory financing. Farina says that most companies carrying stock can use inventory financing.

Let’s say you anticipate a busier than normal Holiday season at your bakery. You might need to buy additional ingredients and packaging to respond to increased demand. It’s a good time to start looking for inventory financing.

Having helped hundreds of Canadian businesses access financing, Farina says that it’s better to ask for a little more money than what you need.

“You calculated that you will need $30,000 to buy ingredients and another $20,000 for packaging. My advice is to always ask for a bit more, say $60,000 in total, so that you have a buffer for extras or unforeseen situations, like a last-minute increase in the price of ingredients.”

How much should I borrow?

Borrowing too much will pressure your company’s cash flow uselessly, while borrowing too little means having to return for another loan, causing delays and additional fees.

Properly assessing needs upfront helps avoid these issues. Plan carefully, considering your business's seasonality and cash flow needs to align borrowing with revenue generation. Many free or low-cost tracking inventory software options are available to help you make accurate sales predictions.

Avoid contacting your banker at the very last minute. In some situations, it can take up to a few weeks before a loan is authorized and disbursed into your bank account. Starting the process in advance can save you many headaches.

Most common types of inventory financing

There are different options to finance inventory purchases:

1. Purchase order (PO) financing

PO financing is a short-term loan providing your business with cash upfront to pay suppliers and take advantage of special discounts. This type of financing allows businesses to accept larger contracts and take advantage of growth opportunities. Some financial institutions might ask for quotes, a copy of the purchase contract or previous invoices.

2. Working capital loan

A working capital loan (or a cash flow) loan is a short-term business loan to help finance your day-to-day operations. “It’s a multi-purpose loan that can be used to finance a variety of things, from inventory to marketing, salaries and smaller pieces of equipment,” says Farina, who adds that working capital loans are often used by fast-growing companies. “It’s an injection of cash. It will give you the liquidity you need.”

3. Line of credit

A line of credit is a short-term, flexible loan that you can use to borrow up to a pre-set amount of money, paying interest on the amount that was borrowed. Often secured by inventory and accounts receivable, lines of credit are considered “demand” loans, meaning the financial institution can demand full repayment at any time.

4. Factoring

Factoring is a financial transaction in which a company sells its accounts receivable to a third party at a discount rate to get cash right away. These funds can then be used for inventory acquisition. Factoring is offered by factoring intermediaries and some banks (though not BDC) in exchange for a fee. Factoring can help free up cash quickly, but its main disadvantage is cost, which can be significant, especially if the factoring company believes there is an elevated risk that your customers won’t pay you.

Pro tip: Keep an eye on your inventory turnover ratio

For larger financing amounts, lenders might ask about your inventory turnover ratio, which shows how many times per year your company converts inventory into sales.

The standard method for calculating the inventory turnover ratio involves selecting from your balance sheet the cost of goods sold (COGS) and dividing it by your average inventory value.

A higher inventory turnover number indicates that a company’s inventory has good liquidity.

What documents do I need to apply for inventory financing?

Farina says that while it depends on the amount you request and other factors, such as the complexity of your project and your financial situation, most financial institutions will ask for the following documents:

Company details: Information about your company’s history, current operations, strategy and management team experience.
Financial statements: Banks typically review financial statements to understand a company’s financial health, profitability and capacity to repay debt. For larger loans, statements are needed for the past two years along with interim statements comparing the latest period with the same period in the previous year. For smaller loans, tax returns may suffice.
Financial projections: Banks typically require a monthly cash flow forecast for the remainder of the current year and the following 12 months. In some cases, two years of projections may be requested.
How you’ll use the loan: “Bankers need numbers,” says Farina. Prepare details about the projected sales increase, plans for using the financing and exactly how it will help your business. “In my bakery example, we won’t ask how much you plan to spend on flour or sugar. But we want to see that you did a bit planning and research,” she adds.

Benefits of inventory financing

Preserve cash

Using financing to buy inventory helps you meet customer demand without depleting your cash on hand. “A financial cushion for unexpected expenses is essential for all businesses,” says Farina.

Increase sales and continue growing

Inventory financing helps your business grow and reduces the risk of lost sales due to stockouts.

Take advantage of promotions

Financing allows you to take advantage of bulk and promotional discounts. But Farina says that you shouldn’t overstock and always pay attention to your sales cycles.

Don’t buy beach equipment when the winter starts. Gear up, but don't indebt your business for longer than necessary.

Keep your customers happy

Inventory financing can help ensure a steady supply chain, which gives your business credibility in front of customers. “Knowing that your products are consistently in stock will build customer trust and satisfaction”, concludes Farina.

Next step

Discover how to set KPIs, ensure that you have the right amount of inventory, and improve your company’s cash flow by downloading our free guide for entrepreneurs: Inventory Management.